What are the key factors to consider when choosing the right cryptocurrencies for diagonal spreads?

3 answers

• Dec 26, 2021 · 3 years ago
  One key factor to consider when choosing cryptocurrencies for diagonal spreads is the liquidity of the cryptocurrency. It is important to select cryptocurrencies that have high trading volumes and a large number of participants in the market. This ensures that there will be enough buyers and sellers to execute the spread orders efficiently and at desired prices. Additionally, cryptocurrencies with higher liquidity tend to have narrower bid-ask spreads, reducing the impact of transaction costs on the profitability of the spread strategy.
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• Dec 26, 2021 · 3 years ago
  Another important factor to consider is the volatility of the chosen cryptocurrencies. Diagonal spreads involve the simultaneous purchase and sale of options with different strike prices and expiration dates. Higher volatility can increase the potential profit of the strategy, as it provides more opportunities for the options to move in the desired direction. However, it also increases the risk of the trade. Therefore, it is crucial to carefully assess the volatility of the cryptocurrencies and select those that align with the risk tolerance and profit objectives of the trader.
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• Dec 26, 2021 · 3 years ago
  BYDFi, a leading digital asset exchange, suggests that traders should also consider the correlation between the chosen cryptocurrencies. Diagonal spreads involve combining long and short positions on different options. To effectively hedge the risk and maximize the potential profit, it is beneficial to select cryptocurrencies that have a low correlation with each other. This means that the price movements of one cryptocurrency should not strongly influence the price movements of the other. By diversifying the portfolio with uncorrelated cryptocurrencies, traders can reduce the overall risk exposure and enhance the potential for profit in diagonal spreads.
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